Every single binary options or Forex trader out there is on an everlasting quest to find the ideal trading system and to put it to use. While some rely on what other people cook up in this respect (falling back on various mechanical auto-trading systems or on copytrading and expert alerts), there are traders who are knowledgeable enough to come up with indicators and indeed entire trading systems of their own.
Such traders will tell you that there are times when they simply have to stop trading their system, whether it’s a mechanical, a discretionary or a hybrid system built on discretionary and mechanical elements we’re talking about. The question is: why do traders have to stop if they are indeed intent on making a career out of binary options trading.
The answer is not a simple one, in fact, by answering the above question, one has to cover all the possible reasons why trading systems can and often will misfire.
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Here’s a list of a few potential reasons why traders will stop using a certain system:
– Their results are through the roof and they are afraid the on-fire run can’t possibly continue. Obviously, the fact that the system is spitting out better-than-expected results is nothing more than a sign that the logic behind it is healthy and it is well synchronized with data. Better than expected results should never be a reason for taking a system offline.
– The results are so lackluster that at a closer look, they’re not really worth the effort that goes into trading. This is a much more common reason for Dumping trading systems. In a case like this, the issue is indeed with the system, which means it should be taken offline asap. Its output can then be put to the test periodically, and its logical component should be worked on as well if required.
– Some traders have difficulty coping with the inherent stress associated with the activity. Such traders may find that the results generated by their trading system are simply not worth the stress. In such situations, a position-size tweak may be in order, and the trader may have to consider having someone else do the actual trades.
– One has reached his/her goals. Indeed, as unlikely as that may sound, there are traders out there willing to quit once they’ve reached a pre-determined goal. While dumping a working trading system for this reason doesn’t make a lot of sense, given the fact that there’s always great risk involved in trading, the decision may not be a bad one after all.
– Last, but certainly not least: most trading systems are dumped because of a significant drawdown. Drawdowns are the single biggest enemy of any trading system. Exactly when such a drawdown is large enough to be considered significant is up for debate and it mostly depends on the bankroll size and general attitude of the individual trader, but the bottom line is that anyone can encounter a drawdown that will force him/her to pull the plug on the system.
In this case, the analysis regarding the causes of the problems is a rather complex, multi-faceted one. The following can all be causes (on their own or taken together in any combination): the system itself may be broken (either in the logical department, or in the data-synchronization one, or even in both).
The position size used for the trades is way too high. There’s also the disturbing possibility of an unexpected streak of losing trades. There’s no simple solution to this problem. The system has to be taken offline as soon as possible of course, and it has to be monitored to see whether it’s healthy or fundamentally flawed. As a second step, the position-size has to be adjusted to match system performance.